UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-07096
___________________________________________________
Investment Grade Municipal Income Fund Inc.
____________________________________________________________________________
(Exact name of registrant as specified in charter)
51 West 52(nd) Street, New York, New York 10019-6114
____________________________________________________________________________
(Address of principal executive offices) (Zip code)
Mark F. Kemper, Esq.
UBS Global Asset Management
51 West 52(nd) Street
New York, NY 10019-6114
(Name and address of agent for service)
Copy to:
Jack W. Murphy, Esq.
Dechert LLP
1775 I Street, N.W.
Washington, DC 20006-2401
Registrant's telephone number, including area code: 212-882 5000
Date of fiscal year end: September 30
Date of reporting period: March 31, 2006
ITEM 1. REPORTS TO STOCKHOLDERS.
--------------------------------
[LOGO OF UBS] UBS Global Asset
Management
INVESTMENT GRADE MUNICIPAL
INCOME FUND INC.
SEMIANNUAL REPORT
MARCH 31, 2006
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
May 15, 2006
DEAR SHAREHOLDER,
We are pleased to present you with the semiannual report for Investment Grade
Municipal Income Fund Inc. (the "Fund")for the six-month period ended March 31,
2006.
PERFORMANCE
Over the six-month period, the Fund returned 0.97% on a net asset value basis
and 5.50% on a market price basis. Over the same period, the median returns for
the Fund's peer group, the Lipper General Municipal Debt Funds (Leveraged), were
1.55% and 3.97% based on net asset value and market price, respectively.
Finally, the Fund's benchmark, the Lehman Brothers Municipal Bond Index (the
"Index") returned 0.98% for the period. (For more performance information,
please refer to "Performance at a Glance" on page 6.)
The Fund continued to use leverage during the period, which was slightly more
than 41% of total assets as of March 31, 2006. While short-term rates rose over
the period and increased the Fund's borrowing costs, this leverage still had a
positive effect on the Fund's income during the reporting period, as the yields
on the Fund's longer-term bonds more than offset the borrowing costs. Leverage
magnifies returns on both the upside and on the downside, creating a wider range
of returns within the Fund's peer group.
--------------------------------------------------------------------------------
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
INVESTMENT GOAL:
High level of current income exempt from federal income tax, consistent with
preservation of capital.
PORTFOLIO MANAGER:
Kevin McIntyre
UBS Global Asset Management (Americas) Inc.
COMMENCEMENT:
November 6, 1992
NYSE SYMBOL:
PPM
DIVIDEND PAYMENTS:
Monthly
--------------------------------------------------------------------------------
AN INTERVIEW WITH PORTFOLIO MANAGER KEVIN McINTYRE
Q. HOW WOULD YOU DESCRIBE THE ECONOMIC ENVIRONMENT DURING THE REPORTING PERIOD?
A. The past six months were a rather volatile period for the economy. Energy
prices, which had been exacerbated after Hurricanes Katrina and Rita hit the
Gulf Coast, remained high throughout the period. Consumer confidence, after
plunging in September, continued to slide in October before recovering
fairly steadily during the next four months. Despite the rebound at
year-end, the fourth quarter saw a substantial
--------------------------------------------------------------------------------
1
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
drop-off in gross domestic product (GDP) growth after a disappointing
holiday season, with the economy expanding at just 1.7%--the lowest rate
since 2003. The first quarter of 2006 was much improved, however, with the
economy growing at 4.8% according to advance estimates, its highest growth
rate in nearly three years.
Q. HOW DID THE FEDERAL RESERVE BOARD (THE "FED") REACT TO THESE ECONOMIC
CONDITIONS?
A. The Fed--headed by its new chairman, Ben Bernanke--continued its tightening
campaign, raising the federal funds rate 25 basis points on four separate
occasions during the reporting period, and once more after the period ended,
to bring the fed funds rate to 5.00%. (The federal funds rate is the
interest rate banks charge each other for overnight loans.)
The market consensus seems to be that the Fed may be near the end of this
current tightening policy (the Fed has raised rates at 16 consecutive
meetings since June 2004). While we can't be certain exactly when the Fed
will pause or end its current policy, we believe it is unlikely that 2006
will be the year of uninterrupted rate increases that 2005 was.
Q. HOW DID THE MUNICIPAL BOND MARKET PERFORM IN THIS ENVIRONMENT?
A. Over the reporting period, the municipal bond market outperformed
Treasuries. Both municipal bonds and Treasuries saw their yields rise over
this time period, but municipal bonds outperformed on a percentage basis.
The most significant outperformance was on the long end of the yield curve,
in the 30-year area, which made it the best-performing segment of the
municipal bond market.
The one notable exception to municipal bonds' trend of outperformance was on
the front end of the yield curve, as shorter-dated issues underperformed
similarly dated Treasuries.
Q. HOW DID YOU POSITION THE PORTFOLIO DURING THE PERIOD WITH REGARD TO THE
YIELD CURVE?
A. Our expectation during the reporting period was that yields would continue
to rise in concert with the Fed's interest rate increases. Given that
belief, we maintained a defensive duration position relative to the Fund's
Lipper peer group.
However, we did take the opportunity to extend the Fund's duration
opportunistically during the period. As of March 31, 2006, the Fund's
duration (a measure of its sensitivity to interest rate changes) was
increased from where it was six months ago. We believed that the
--------------------------------------------------------------------------------
2
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
general reaction of the municipal bond market to rising interest rates would
be somewhat less severe than it had been over the prior reporting period,
and that a somewhat longer duration would better position the Fund versus
its Lipper peers.
In terms of positioning, we increased our exposure in the longer area of the
yield curve, concentrating on securities with maturity dates of 20 years and
longer, and we decreased our position in the 10- to 15-year area of the
curve. Both moves clearly benefited the portfolio on an absolute basis, as
the longer end of the curve performed better than other areas, including the
intermediate area. However, our underweight exposure to the 30-year area
detracted somewhat from the Fund's relative performance versus the Index and
its Lipper peers.
Q. FROM A SECTOR STANDPOINT, WHAT WERE IMPORTANT POSITIONS FOR THE FUND?
A. We strive to maintain a well-diversified portfolio regardless of market
conditions, and as a result, the Fund holds bonds in a number of different
industry sectors and subsectors. Over the past six months, however, we
focused particularly on the water and airport sectors. Our research
indicates that the water sector tends to have stronger revenue and earnings
stability than some other sectors of the municipal market, even in changing
economic climates. We found relative value in the water sector versus other
sectors, and given the sector's relative stability, we added selectively to
positions there, making it the Fund's largest sector position as of period
end.
Meanwhile, the airport sector continued to rebound during the period. A
significant portion of airport sector bonds are subject to the Alternative
Minimum Tax (AMT), and tend to offer higher yields. During the period, we
purchased NYC IDA revenue bonds for the Terminal One Group Association. The
bonds are rated A3/BBB+, are subject to AMT and have performed well over
this period. In addition, these bonds helped us to diversify the credit
quality of the portfolio.
While our long-term outlook for the healthcare sector as a whole remains
negative, we see positive trends developing for certain healthcare providers
that have stable or improving finances and strong market share. With that in
mind, we have selectively added to our holdings in this sector, and
performance has been solid in recent months. Nonetheless, we remained
underweight to the sector on the whole, which ultimately detracted from
relative returns.
Although the tobacco sector posted very strong performance again during the
reporting period, we continued to avoid it, which detracted
--------------------------------------------------------------------------------
3
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
from performance during the period. We do not believe the potential rewards
in the tobacco sector are commensurate with the risks our analysis indicates
these bonds entail. In an attempt to concentrate Fund assets on risks we
feel are likely to be compensated, we minimized our exposure to the sector.
Q. DID THE FUND FOCUS ON ANY SPECIFIC STATES OR REGIONS?
A. From a regional standpoint, we continued to focus on states that exhibited
improved fiscal health and offered attractively valued municipal bonds.
Issues that we believe met that definition included long-term California
bonds and New York securities. Those two states combined represented more
than 36% of the Fund's total investments as of period end.
Q. WHAT FACTORS DO YOU BELIEVE WILL AFFECT THE FUND OVER THE COMING MONTHS?
A. We will continue to monitor a number of factors, including inflation and the
overall strength of the economy, both of which will likely play a role in
the Fed's future decisions on interest rates. The direction and magnitude of
interest rate changes will continue to play a significant role in our
duration strategy, as we seek to mitigate the effects of rising rates on the
portfolio. Overall, the portfolio remains well diversified, and we
anticipate continuing to seek out tax-advantaged yield opportunities while
maintaining liquidity.
--------------------------------------------------------------------------------
4
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
We thank you for your continued support and welcome any comments or questions
you may have. For additional information on the UBS family of funds,* please
contact your financial advisor, or visit us at www.ubs.com/globalam-us.
Sincerely,
/s/ W. Douglas Beck
W. DOUGLAS BECK, CFA
President
Investment Grade Municipal Income Fund Inc.
Executive Director
UBS Global Asset Management (Americas) Inc.
/s/ Kevin McIntyre
KEVIN McINTYRE
Portfolio Management Team
Investment Grade Municipal Income Fund Inc.
Director
UBS Global Asset Management (Americas) Inc.
/s/ Elbridge T. Gerry III
ELBRIDGE T. GERRY III
Portfolio Management Team
Investment Grade Municipal Income Fund Inc.
Managing Director
UBS Global Asset Management (Americas) Inc.
This letter is intended to assist shareholders in understanding how the Fund
performed during the six-month period ended March 31, 2006. The views and
opinions in the letter were current as of May 15, 2006. They are not guarantees
of performance or investment results and should not be taken as investment
advice. Investment decisions reflect a variety of factors, and we reserve the
right to change our views about individual securities, sectors and markets at
any time. As a result, the views expressed should not be relied upon as a
forecast of the Fund's future investment intent. We encourage you to consult
your financial advisor regarding your personal investment program.
* Mutual funds are sold by prospectus only. You should read it carefully and
consider a fund's investment objectives, risks, charges, expenses and other
important information contained in the prospectus before investing.
Prospectuses for most of our funds can be obtained from your financial
advisor, by calling UBS Funds at 800-647 1568 or by visiting our Web site at
www.ubs.com/globalam-us.
--------------------------------------------------------------------------------
5
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PERFORMANCE AT A GLANCE (UNAUDITED)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED 3/31/06
NET ASSET VALUE RETURNS 6 MONTHS 1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------------------------------
Investment Grade Municipal Income Fund Inc. 0.97% 4.31% 5.91% 6.01%
--------------------------------------------------------------------------------------------
Lipper General Municipal Debt Funds
(Leveraged) median 1.55% 5.94% 6.73% 6.59%
============================================================================================
MARKET PRICE RETURNS
--------------------------------------------------------------------------------------------
Investment Grade Municipal Income Fund Inc. 5.50% 10.51% 5.57% 7.29%
--------------------------------------------------------------------------------------------
Lipper General Municipal Debt Funds
(Leveraged) median 3.97% 11.88% 7.91% 6.99%
============================================================================================
INDEX RETURNS
--------------------------------------------------------------------------------------------
Lehman Brothers Municipal Bond Index 0.98% 3.81% 5.18% 5.87%
============================================================================================
PAST PERFORMANCE DOES NOT PREDICT FUTURE PERFORMANCE. THE RETURN AND VALUE OF AN
INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN SOLD, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST. NAV RETURN ASSUMES, FOR ILLUSTRATION
ONLY, THAT DIVIDENDS WERE REINVESTED AT THE NET ASSET VALUE ON THE PAYABLE
DATES. NAV AND MARKET PRICE RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE
CUMULATIVE. RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER
COULD PAY ON FUND DISTRIBUTIONS.
Lipper peer group data calculated by Lipper Inc.; used with permission. The
Lipper median is the return of the fund that places in the middle of the peer
group.
SHARE PRICE, DIVIDEND AND YIELDS AS OF 3/31/06
--------------------------------------------------------------------------------------------
Market Price $13.39
--------------------------------------------------------------------------------------------
Net Asset Value (per share applicable to common shareholders) $15.05
--------------------------------------------------------------------------------------------
Net Investment Income Dividends paid to common shareholders
during the twelve months ended 3/31/06 $0.7065
--------------------------------------------------------------------------------------------
March 2006 Dividend $0.063
--------------------------------------------------------------------------------------------
Market Yield* 5.65%
--------------------------------------------------------------------------------------------
NAV Yield* 5.02%
============================================================================================
* Market yield is calculated by multiplying the March dividend by 12 and
dividing by the month-end market price. NAV yield is calculated by
multiplying the March dividend by 12 and dividing by the month-end net asset
value. Prices and yields will vary.
--------------------------------------------------------------------------------
6
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO STATISTICS (UNAUDITED)
CHARACTERISTICS 3/31/06 9/30/05 3/31/05
--------------------------------------------------------------------------------------------
Net Assets Applicable to Common
Shareholders (mm) $155.8 $162.2 $160.5
--------------------------------------------------------------------------------------------
Weighted Average Maturity 15.9 yrs 14.5 yrs 11.5 yrs
--------------------------------------------------------------------------------------------
Weighted Average Duration 5.5 yrs 4.1 yrs 4.3 yrs
--------------------------------------------------------------------------------------------
Weighted Average Coupon 5.2% 5.2% 5.1%
--------------------------------------------------------------------------------------------
Leverage** 41.3% 40.4% 40.6%
--------------------------------------------------------------------------------------------
Callable/Maturing Within
Five Years* 9.9% 9.1% 19.5%
--------------------------------------------------------------------------------------------
Callable/Maturing Beyond
Five Years* 90.1% 90.9% 80.5%
============================================================================================
PORTFOLIO COMPOSITION*** 3/31/06 9/30/05 3/31/05
--------------------------------------------------------------------------------------------
Long-Term Municipal Bonds 159.6% 159.1% 147.9%
--------------------------------------------------------------------------------------------
Short-Term Municipal Notes 8.8 4.1 18.6
--------------------------------------------------------------------------------------------
Futures 0.0(+) 0.8 0.1
--------------------------------------------------------------------------------------------
Other Assets Less Liabilities 2.2 3.8 1.9
--------------------------------------------------------------------------------------------
Liquidation Value of Auction
Preferred Shares (70.6) (67.8) (68.5)
--------------------------------------------------------------------------------------------
TOTAL 100.0% 100.0% 100.0%
============================================================================================
CREDIT QUALITY*** 3/31/06 9/30/05 3/31/05
--------------------------------------------------------------------------------------------
AAA 93.1% 88.2% 66.3%
--------------------------------------------------------------------------------------------
AA 14.3 23.4 27.5
--------------------------------------------------------------------------------------------
A 16.6 15.0 19.0
--------------------------------------------------------------------------------------------
BBB 17.9 13.9 19.0
--------------------------------------------------------------------------------------------
BB - 1.2 -
--------------------------------------------------------------------------------------------
A-1 8.8 0.7 16.8
--------------------------------------------------------------------------------------------
Nonrated 17.7 20.8 17.9
--------------------------------------------------------------------------------------------
Futures 0.0(+) 0.8 0.1
--------------------------------------------------------------------------------------------
Other Assets Less Liabilities 2.2 3.8 1.9
--------------------------------------------------------------------------------------------
Liquidation Value of Auction
Preferred Shares (70.6) (67.8) (68.5)
--------------------------------------------------------------------------------------------
TOTAL 100.0% 100.0% 100.0%
============================================================================================
* Weightings represent percentages of total investments as of the dates
indicated. The Fund's portfolio is actively managed and its composition
will vary over time.
** As a percentage of total assets as of the dates indicated.
*** As a percentage of net assets applicable to common shareholders as of the
dates indicated. Credit quality ratings shown are designated by Standard
& Poor's Rating Group, an independent rating agency.
(+) Represents less than 0.05% of net assets applicable to common shareholders.
--------------------------------------------------------------------------------
7
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO STATISTICS (UNAUDITED) (CONCLUDED)
TOP FIVE STATES* 3/31/06 9/30/05 3/31/05
--------------------------------------------------------------------------------------------
California 19.4% California 26.9% California 19.8%
--------------------------------------------------------------------------------------------
New York 16.8 Texas 18.5 Texas 10.4
--------------------------------------------------------------------------------------------
Texas 12.0 New York 9.7 New York 9.9
--------------------------------------------------------------------------------------------
North Carolina 7.4 North Carolina 7.4 North Carolina 5.8
--------------------------------------------------------------------------------------------
Pennsylvania 6.0 Pennsylvania 6.0 Indiana 5.6
--------------------------------------------------------------------------------------------
TOTAL 61.6% 68.5% 51.5%
============================================================================================
TOP FIVE SECTORS* 3/31/06 9/30/05 3/31/05
--------------------------------------------------------------------------------------------
Water 21.8% Power 22.5% Power 21.2%
--------------------------------------------------------------------------------------------
University 14.2 Water 21.3 Hospital 10.9
--------------------------------------------------------------------------------------------
Power 12.2 University 7.3 Lease 10.7
--------------------------------------------------------------------------------------------
Hospital 9.6 Hospital 6.1 Water 8.9
--------------------------------------------------------------------------------------------
Airport 8.5 Lease 5.5 University 7.9
--------------------------------------------------------------------------------------------
TOTAL 66.3% 62.7% 59.6%
============================================================================================
* Weightings represent percentages of total investments as of the dates
indicated. The Fund's portfolio is actively managed and its composition
will vary over time.
--------------------------------------------------------------------------------
8
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS -- MARCH 31, 2006 (UNAUDITED)
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
---------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--159.65%
---------------------------------------------------------------------------------------------------------
ALASKA--1.99%
$1,000 Alaska International
Airports Revenues
Refunding-Series A
(MBIA Insured)(++) Aaa AAA 10/01/19 5.000% $1,038,080
---------------------------------------------------------------------------------------------------------
1,000 Alaska International
Airports Revenues
Refunding-Series A
(MBIA Insured)(++) Aaa AAA 10/01/20 5.000 1,035,550
---------------------------------------------------------------------------------------------------------
1,000 Alaska International
Airports Revenues
Refunding-Series A
(MBIA Insured)(++) Aaa AAA 10/01/21 5.000 1,033,020
---------------------------------------------------------------------------------------------------------
3,106,650
=========================================================================================================
ARIZONA--1.63%
2,380 Arizona State
Transportation
Board Highway
Revenue-Series B Aa1 AAA 07/01/18 5.250 2,540,888
=========================================================================================================
ARKANSAS--1.01%
1,525 Little Rock Capital
Improvement
Revenue Parks
& Recreation
Projects-Series A NR NR 01/01/18 5.700 1,573,053
=========================================================================================================
CALIFORNIA--32.69%
5,000 California Educational
Facilities Authority
Revenue
Refunding-Pepperdine
University-Series A
(FGIC Insured) Aaa AAA 09/01/33 5.000 5,154,650
---------------------------------------------------------------------------------------------------------
3,000 California Statewide
Communities
Development
Authority-Irvine
Apartment
Communities-Series
A-3 (Mandatory Put
05/17/10 @ 100) Baa2 BBB 05/15/25 5.100(+) 3,088,170
---------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
9
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS -- MARCH 31, 2006 (UNAUDITED)
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
---------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(CONTINUED)
---------------------------------------------------------------------------------------------------------
CALIFORNIA--(CONTINUED)
$1,750 California Statewide
Communities
Development
Authority
Revenue-Kaiser
Permanente-Series H
(Mandatory Put
05/01/08 @ 100) NR A+ 04/01/34 2.625%(+) $1,699,198
---------------------------------------------------------------------------------------------------------
2,150 Fontana Redevelopment
Agency Tax Allocation
Jurupa Hills
Redevelopment
Project A NR A- 10/01/17 5.500 2,240,364
---------------------------------------------------------------------------------------------------------
2,905 Inglewood Unified
School District 1998
Election-Series C
(FSA Insured) Aaa AAA 10/01/28 5.000 3,013,444
---------------------------------------------------------------------------------------------------------
2,390 Los Angeles County
Sanitation District
Financing Authority
Revenue Capital
Projects-District
No. - 14 Subseries B
(FGIC Insured) NR AAA 10/01/28 5.000 2,500,370
---------------------------------------------------------------------------------------------------------
6,250 Los Angeles Wastewater
Systems Revenue
Refunding-Series A
(FSA Insured) Aaa AAA 06/01/32 5.000 6,455,500
---------------------------------------------------------------------------------------------------------
3,200 Los Angeles Water &
Power Revenue Power
Systems-Series A-A-1
(FSA Insured) Aaa AAA 07/01/21 5.250 3,382,880
---------------------------------------------------------------------------------------------------------
5,000 Los Angeles Water &
Power Revenue
Refunding Power
Systems-Series A,
Subseries A-2
(MBIA Insured) Aaa AAA 07/01/27 5.000 5,181,000
---------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
10
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS -- MARCH 31, 2006 (UNAUDITED)
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
---------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(CONTINUED)
---------------------------------------------------------------------------------------------------------
CALIFORNIA--(CONCLUDED)
$10,000 Sacramento County
Sanitation District
Financing Authority
Revenue Refunding
(AMBAC Insured) Aaa AAA 12/01/27 5.000% $10,269,400
---------------------------------------------------------------------------------------------------------
2,600 San Diego County
Regional Airport
Authority Revenue
Refunding (AMBAC
Insured)(++) Aaa AAA 07/01/16 5.250 2,778,360
---------------------------------------------------------------------------------------------------------
5,000 University of California
Revenue-Series A
(AMBAC Insured)# Aaa AAA 05/15/28 5.000 5,178,400
---------------------------------------------------------------------------------------------------------
50,941,736
=========================================================================================================
COLORADO--1.03%
1,527 University of Colorado
Participation Interests NR A+ 12/01/13 6.000 1,611,098
=========================================================================================================
FLORIDA--6.19%
3,350 Florida Board of
Education Capital
Outlay-Series E
(FGIC Insured) Aaa AAA 06/01/24 5.000 3,480,013
---------------------------------------------------------------------------------------------------------
1,175 Gainesville Utilities
Systems Revenue-
Series A Aa2 AA 10/01/20 5.250 1,266,204
---------------------------------------------------------------------------------------------------------
2,000 Miami-Dade County
Aviation Revenue-Series B
(XLCA Insured)(++) Aaa AAA 10/01/13 5.000 2,101,380
---------------------------------------------------------------------------------------------------------
2,700 Miami-Dade County
Aviation Revenue-Series B
(XLCA Insured)(++) Aaa AAA 10/01/18 5.000 2,803,437
---------------------------------------------------------------------------------------------------------
9,651,034
=========================================================================================================
--------------------------------------------------------------------------------
11
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS -- MARCH 31, 2006 (UNAUDITED)
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
---------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(CONTINUED)
---------------------------------------------------------------------------------------------------------
ILLINOIS--0.97%
$1,200 Illinois Educational
Facilities Authority
Revenue-Augustana
College-Series A Baa1 NR 10/01/22 5.625% $1,257,588
---------------------------------------------------------------------------------------------------------
250 Metropolitan Pier &
Exposition Authority A1 NR 06/15/27 6.500 250,515
---------------------------------------------------------------------------------------------------------
1,508,103
=========================================================================================================
INDIANA--4.65%
4,480 Indiana Health Facility
Financing Authority
Revenue Ascension
Health Subordinated
Credit-A Aa3 AA- 04/01/10 5.000 4,661,753
---------------------------------------------------------------------------------------------------------
2,500 Indianapolis Airport
Authority Revenue
Refunding-Special
Facilities-FedEx Corp.
Project (Federal Express
Co. Insured)(++) Baa2 BBB 01/15/17 5.100 2,585,825
---------------------------------------------------------------------------------------------------------
7,247,578
=========================================================================================================
KENTUCKY--1.32%
2,055 Boone County Pollution
Control Revenue-
Dayton Power &
Light Co.-Series A Baa1 BBB- 11/15/22 6.500 2,059,398
=========================================================================================================
MASSACHUSETTS--7.32%
5,000 Massachusetts Health
& Educational Facilities
Authority Revenue-
Harvard University-
Series B Aaa AAA 07/15/32 5.000 5,230,300
---------------------------------------------------------------------------------------------------------
6,000 Massachusetts Health
& Educational Facilities
Authority Revenue-
Harvard University-
Series DD Aaa AAA 07/15/35 5.000 6,179,220
---------------------------------------------------------------------------------------------------------
11,409,520
=========================================================================================================
--------------------------------------------------------------------------------
12
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS -- MARCH 31, 2006 (UNAUDITED)
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
---------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(CONTINUED)
---------------------------------------------------------------------------------------------------------
MICHIGAN--4.69%
$2,055 Michigan State Hospital
Finance Authority
Revenue Ascension
Health Subordinated
Credit-A Aa3 AA- 05/01/12 5.000% $2,150,578
---------------------------------------------------------------------------------------------------------
5,000 Michigan State Hospital
Finance Authority
Revenue Refunding-
Trinity Health
Credit-Series D Aa3 AA- 08/15/25 5.000 5,158,300
---------------------------------------------------------------------------------------------------------
7,308,878
=========================================================================================================
MINNESOTA--0.99%
1,500 Shakopee Health Care
Facilities-Saint Francis
Regional Medical Center
Revenue Refunding NR BBB 09/01/17 5.000 1,545,645
=========================================================================================================
NEVADA--4.39%
6,750 Clark County Pollution
Control Revenue-
Nevada Power Co.
Project-Series B
(FGIC Insured) Aaa AAA 06/01/19 6.600 6,834,577
=========================================================================================================
NEW JERSEY--6.71%
10,000 New Jersey State
Educational Facilities
Authority Revenue
Princeton University-
Series D Aaa AAA 07/01/29 5.000 10,460,000
=========================================================================================================
NEW YORK--28.24%
4,030 Long Island Power
Authority Electric
Systems Revenue-
Series C A3 A- 09/01/17 5.500 4,352,763
---------------------------------------------------------------------------------------------------------
1,765 Metropolitan
Transportation Authority
New York Dedicated
Tax Fund-Series A
(FSA Insured) Aaa AAA 11/15/24 5.250 1,885,073
---------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
13
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS -- MARCH 31, 2006 (UNAUDITED)
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
---------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(CONTINUED)
---------------------------------------------------------------------------------------------------------
NEW YORK--(CONTINUED)
$2,500 New York City General
Obligation-Series G A1 A+ 08/01/13 5.000% $2,645,500
---------------------------------------------------------------------------------------------------------
4,815 New York City General
Obligation-Series O A1 A+ 06/01/24 5.000 4,986,607
---------------------------------------------------------------------------------------------------------
2,000 New York City Industrial
Development Agency
Special Facilities
Revenue-Terminal
One Group
Association
Project (++) A3 BBB+ 01/01/15 5.500 2,135,740
---------------------------------------------------------------------------------------------------------
2,750 New York City
Industrial Development
Agency Special Facilities
Revenue-Terminal
One Group Association
Project (++) A3 BBB+ 01/01/17 5.500(+) 2,931,362
---------------------------------------------------------------------------------------------------------
3,250 New York City Industrial
Development Agency
Special Facilities
Revenue-Terminal
One Group Association
Project (++) A3 BBB+ 01/01/18 5.500(+) 3,461,705
---------------------------------------------------------------------------------------------------------
3,000 New York City Municipal
Water Finance
Authority Water &
Sewer Systems
Revenue-Series
C (MBIA Insured) Aaa AAA 06/15/26 5.000 3,134,850
---------------------------------------------------------------------------------------------------------
8,000 New York City
Municipal Water
Finance Authority
Water & Sewer Systems
Revenue-Series
C (MBIA Insured) Aaa AAA 06/15/27 5.000 8,353,440
---------------------------------------------------------------------------------------------------------
3,140 Triborough Bridge
& Tunnel Authority
Revenue-Series B Aa2 AA- 11/15/19 5.250 3,372,831
---------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
14
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS -- MARCH 31, 2006 (UNAUDITED)
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
---------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(CONTINUED)
---------------------------------------------------------------------------------------------------------
NEW YORK--(CONCLUDED)
$6,400 Triborough Bridge
& Tunnel Authority
Revenue-Subordinate
Bonds Aa3 A+ 11/15/30 5.250% $6,740,224
---------------------------------------------------------------------------------------------------------
44,000,095
=========================================================================================================
NORTH CAROLINA--12.41%
5,000 North Carolina Eastern
Municipal Power
Agency-Series A Baa2 BBB 01/01/11 5.500 5,310,100
---------------------------------------------------------------------------------------------------------
2,000 North Carolina Eastern
Municipal Power
Agency-Series A Baa2 BBB 01/01/12 5.500 2,138,840
---------------------------------------------------------------------------------------------------------
3,065 North Carolina Eastern
Municipal Power
Agency-Series A
(Escrowed to
Maturity) Baa2 AAA 01/01/21 6.400 3,699,945
---------------------------------------------------------------------------------------------------------
8,745 North Carolina State
Public Improvement-
Series A Aa1 AAA 03/01/24 4.000 8,190,392
---------------------------------------------------------------------------------------------------------
19,339,277
=========================================================================================================
OHIO--6.89%
2,185 Ohio State Higher
Education-Series B Aa1 AA+ 11/01/17 5.250 2,338,365
---------------------------------------------------------------------------------------------------------
8,000 Ohio State Water
Development
Authority-Water
Quality Pollution
Control Aaa AAA 06/01/24 5.000 8,393,040
---------------------------------------------------------------------------------------------------------
10,731,405
=========================================================================================================
PENNSYLVANIA--10.07%
7,125 Allegheny County
Sanitation Authority
Sewer Revenue
Refunding-Series A
(MBIA Insured) Aaa AAA 12/01/24 5.000 7,458,236
---------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
15
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS -- MARCH 31, 2006 (UNAUDITED)
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
---------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(CONTINUED)
---------------------------------------------------------------------------------------------------------
PENNSYLVANIA--(CONCLUDED)
$5,000 Northumberland County
Authority-Guaranteed
Lease Revenue-
Mountain View
Manor Project NR NR 10/01/20 7.000% $5,196,650
---------------------------------------------------------------------------------------------------------
3,000 Susquehanna Area
Regional Airport
Authority Airport
Systems Revenue-
Subseries D Baa2 NR 01/01/18 5.375 3,039,540
---------------------------------------------------------------------------------------------------------
15,694,426
=========================================================================================================
PUERTO RICO--2.01%
3,000 Puerto Rico Housing
Finance Authority-
Capital Funding
Program (HUD
Insured) Aa3 AA 12/01/18 5.000 3,133,740
=========================================================================================================
RHODE ISLAND--1.16%
1,600 Rhode Island Health
& Educational Building
Corp. Revenue
Refunding-Hospital
Financing-Lifespan
Obligation-Series A A3 A- 05/15/11 5.000 1,662,480
---------------------------------------------------------------------------------------------------------
145 Rhode Island Housing
& Mortgage Finance
Corp. Homeownership
Opportunity-
Series 10-A Aa2 AA+ 04/01/27 6.500 145,180
---------------------------------------------------------------------------------------------------------
1,807,660
=========================================================================================================
SOUTH CAROLINA--0.69%
1,000 Greenville
Waterworks Revenue Aa1 AAA 02/01/20 5.250 1,077,760
=========================================================================================================
SOUTH DAKOTA--0.73%
1,120 Standing Rock South
Dakota New Public
Housing** NR NR 08/07/13 6.000 1,143,166
=========================================================================================================
--------------------------------------------------------------------------------
16
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS -- MARCH 31, 2006 (UNAUDITED)
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
-----------------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(CONTINUED)
-----------------------------------------------------------------------------------------------------------------
TENNESSEE--1.66%
$2,500 Memphis-Shelby
County Airport
Authority Special
Facilities Revenue-
Federal Express Corp. Baa2 BBB 09/01/09 5.000% $2,583,050
=================================================================================================================
TEXAS--20.21%
6,665 Austin Water &
Wastewater System
Revenue Refunding
(MBIA Insured) Aaa AAA 05/15/28 5.000 6,922,602
-----------------------------------------------------------------------------------------------------------------
4,000 Coastal Bend Health
Facilities Development-
Incarnate Word
Health System
(Escrowed to
Maturity)
(AMBAC Insured) Aaa AAA 01/01/17 6.300 4,470,120
-----------------------------------------------------------------------------------------------------------------
210 Eagle Mountain &
Saginaw Independent
School District-School
Building-Unrefunded
Balance-(PSF-GTD) Aaa AAA 08/15/14 5.375 225,378
-----------------------------------------------------------------------------------------------------------------
5,390 Frisco Independent
School District Refunding-
School Building-
Series C (PSF-GTD) Aaa NR 08/15/24 5.000 5,627,484
-----------------------------------------------------------------------------------------------------------------
6,647 Harris County
Texas Lease[double daggar] NR NR 05/01/20 6.750 6,423,136
-----------------------------------------------------------------------------------------------------------------
3,007 Houston Community
College System
Certificates of
Participation[double daggar] NR NR 06/15/25 7.875 3,125,214
-----------------------------------------------------------------------------------------------------------------
3,000 Humble Independent
School District-
School Building
(PSF-GTD) Aaa AAA 02/15/28 5.000 3,118,350
-----------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
17
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS -- MARCH 31, 2006 (UNAUDITED)
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
---------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(CONCLUDED)
---------------------------------------------------------------------------------------------------------
TEXAS--(CONCLUDED)
$1,485 Lower Colorado
River Authority
Transmission
Contract Revenue
(FSA Insured) Aaa AAA 05/15/20 5.250% $1,578,956
---------------------------------------------------------------------------------------------------------
31,491,240
=========================================================================================================
Total Long-Term Municipal Bonds (cost--$247,412,552) 248,799,977
=========================================================================================================
SHORT-TERM MUNICIPAL NOTES--8.76%
---------------------------------------------------------------------------------------------------------
ALABAMA--0.71%
1,100 Montgomery Industrial
Development Board
Pollution Control &
Solid Waste
Disposal Refunding-
General Electric Co.
Project VMIG-1 A-1+ 04/03/06 3.170* 1,100,000
=========================================================================================================
ILLINOIS--4.68%
7,300 Chicago Board of
Education-Dedicated
Revenues-Series D-2
(CIFG Insured) VMIG-1 A-1+ 04/03/06 3.170* 7,300,000
=========================================================================================================
KENTUCKY--1.16%
1,800 Kentucky Economic
Development
Finance Authority
Hospital Facilities
Revenue-Baptist
Healthcare-Series C
(MBIA Insured) VMIG-1 A-1 04/03/06 3.190* 1,800,000
=========================================================================================================
MISSOURI--1.44%
2,250 Missouri Health &
Educational Facilities
Authority Revenue-
Washington University-
Series B (SPA-Dexia
Insured) VMIG-1 A-1+ 04/03/06 3.120* 2,250,000
=========================================================================================================
--------------------------------------------------------------------------------
18
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS -- MARCH 31, 2006 (UNAUDITED)
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
---------------------------------------------------------------------------------------------------------
SHROT-TERM MUNICIPAL BONDS--(CONCLUDED)
---------------------------------------------------------------------------------------------------------
OREGON--0.77%
$1,200 Oregon Health Housing
Educational & Cultural
Facilities Authority-
Peacehealth (U.S. Bank
N.A. Insured) NR A-1+ 04/03/06 3.140%* $1,200,000
=========================================================================================================
Total Short-Term Municipal Notes (cost--$13,650,000) 13,650,000
=========================================================================================================
Total Investments (cost--$261,062,552)--168.41% 262,449,977
---------------------------------------------------------------------------------------------------------
Other assets in excess of liabilities--2.17% 3,386,652
---------------------------------------------------------------------------------------------------------
Liquidation value of auction preferred shares--(70.58)% (110,000,000)
---------------------------------------------------------------------------------------------------------
Net Assets applicable to common shareholders--100.00% $155,836,629
=========================================================================================================
(+) Floating rate security. The interest rate shown is the current rate as of
March 31, 2006.
(++) Security subject to Alternative Minimum Tax.
# Partial amount pledged as collateral for futures transactions.
* Variable rate demand notes are payable on demand. The maturity dates shown
are the next interest rate reset dates. The interest rates shown are the
current rates as of March 31, 2006.
** Security exempt from registration under Rule 144A of the Securities Act of
1933. This security, which represents 0.73% of net assets applicable to
common shareholders as of March 31, 2006, is considered illiquid and
restricted. (See table below for more information).
ACQUISITION MARKET
COST AS A VALUE AS A
PERCENTAGE PERCENTAGE
ILLIQUID AND ACQUISITION ACQUISITION OF COMMON MARKET OF COMMON
RESTRICTED SECURITY DATE COST NET ASSETS VALUE NET ASSETS
------------------------------------------------------------------------------------------
Standing Rock
South Dakota
New Public
Housing, 6.000%,
08/07/13 08/08/02 $1,120,487 0.72% $1,143,166 0.73%
==========================================================================================
--------------------------------------------------------------------------------
19
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS -- MARCH 31, 2006 (UNAUDITED)
[double dagger] The securities detailed in the table below are considered
illiquid and restricted and represent 6.13% of net assets
applicable to common shareholders as of March 31, 2006.
ACQUISITION MARKET
COST AS A VALUE AS A
PERCENTAGE PERCENTAGE
ILLIQUID AND ACQUISITION ACQUISITION OF COMMON MARKET OF COMMON
RESTRICTED SECURITY DATE COST NET ASSETS VALUE NET ASSETS
------------------------------------------------------------------------------------------
Harris County
Texas Lease,
6.750%,
05/01/20 09/07/00 $6,647,214 4.27% $6,423,136 4.12%
------------------------------------------------------------------------------------------
Houston Community
College System
Certificates of
Participation,
7.875%,
06/15/25 04/22/02 3,007,095 1.93 3,125,214 2.01
------------------------------------------------------------------------------------------
$9,654,309 6.20% $9,548,350 6.13%
==========================================================================================
AMBAC -- American Municipal Bond Assurance Corporation
CIFG -- CDC IXIS Financial Guaranty
FGIC -- Financial Guaranty Insurance Company
FSA -- Financial Security Assurance
GTD -- Guaranteed
HUD -- Housing and Urban Development
MBIA -- Municipal Bond Investors Assurance
NR -- Not Rated
PSF -- Permanent School Fund
SPA -- Standby Purchase Agreement
XLCA -- XL Capital Assurance
FUTURES CONTRACTS
NUMBER OF IN EXPIRATION UNREALIZED
CONTRACTS CONTRACTS TO DELIVER EXCHANGE FOR DATE APPRECIATION
-----------------------------------------------------------------------------------------------
U.S. Treasury Note
35 10 Year Futures $3,777,126 June 2006 $53,454
===============================================================================================
See accompanying notes to financial statements
================================================================================
20
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
STATEMENT OF ASSETS AND LIABILITIES -- MARCH 31, 2006 (UNAUDITED)
ASSETS:
Investments in securities, at value (cost-$261,062,552) $262,449,977
--------------------------------------------------------------------------------------
Cash 52,994
--------------------------------------------------------------------------------------
Receivable for interest 3,585,212
--------------------------------------------------------------------------------------
Other assets 30,268
--------------------------------------------------------------------------------------
Total assets 266,118,451
--------------------------------------------------------------------------------------
LIABILITIES:
Payable to investment advisor and administrator 159,195
--------------------------------------------------------------------------------------
Dividends payable to auction preferred shareholders 16,730
--------------------------------------------------------------------------------------
Payable for variation margin 2,734
--------------------------------------------------------------------------------------
Accrued expenses and other liabilities 103,163
--------------------------------------------------------------------------------------
Total liabilities 281,822
--------------------------------------------------------------------------------------
Auction preferred shares series A, B and C-2,200 non-participating
shares authorized, issued and outstanding; $0.001 par value per
auction preferred share; $50,000 liquidation value per auction
preferred share 110,000,000
--------------------------------------------------------------------------------------
Net assets applicable to common shareholders $155,836,629
--------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
Common Stock-$0.001 par value per common share; 199,998,400
shares authorized; 10,356,667 shares issued and outstanding $153,239,012
--------------------------------------------------------------------------------------
Undistributed net investment income 769,655
--------------------------------------------------------------------------------------
Accumulated net realized gain from investment activities and futures 387,083
--------------------------------------------------------------------------------------
Net unrealized appreciation of investments and futures 1,440,879
--------------------------------------------------------------------------------------
Net assets applicable to common shareholders $155,836,629
--------------------------------------------------------------------------------------
Net asset value per common share ($155,836,629 applicable to 10,356,667
common shares outstanding) $15.05
======================================================================================
See accompanying notes to financial statements
================================================================================
21
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
STATEMENT OF OPERATIONS
For the Six
Months Ended
March 31, 2006
(unaudited)
----------------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $6,282,429
----------------------------------------------------------------------------------------
EXPENSES:
Investment advisory and administration fees 1,208,416
----------------------------------------------------------------------------------------
Auction preferred shares expenses 157,907
----------------------------------------------------------------------------------------
Custody and accounting fees 71,660
----------------------------------------------------------------------------------------
Professional fees 42,119
----------------------------------------------------------------------------------------
Reports and notices to shareholders 33,249
----------------------------------------------------------------------------------------
Stock exchange listing fees 11,093
----------------------------------------------------------------------------------------
Transfer agency fees 7,019
----------------------------------------------------------------------------------------
Directors' fees 6,623
----------------------------------------------------------------------------------------
Insurance fees 5,721
----------------------------------------------------------------------------------------
Other expenses 9,618
----------------------------------------------------------------------------------------
1,553,425
----------------------------------------------------------------------------------------
Less: Fee waivers by investment advisor and administrator (268,537)
----------------------------------------------------------------------------------------
Net expenses 1,284,888
----------------------------------------------------------------------------------------
Net investment income 4,997,541
----------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENT ACTIVITIES:
Net realized gains from:
Investments 483,707
----------------------------------------------------------------------------------------
Futures 2,099,422
----------------------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation of:
Investments (2,773,345)
----------------------------------------------------------------------------------------
Futures (1,259,295)
----------------------------------------------------------------------------------------
Net realized and unrealized loss from investment activities (1,449,511)
----------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS PAID TO AUCTION PREFERRED SHAREHOLDERS FROM:
Net investment income (800,430)
----------------------------------------------------------------------------------------
Net realized gain from investment activities (1,187,664)
----------------------------------------------------------------------------------------
Total dividends and distributions paid to auction preferred shareholders (1,988,094)
----------------------------------------------------------------------------------------
Net increase in net assets applicable to common shareholders resulting
from operations $1,559,936
========================================================================================
See accompanying notes to financial statements
================================================================================
22
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
STATEMENT OF CHANGES IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS
For the Six
Months Ended For the
March 31, 2006 Year Ended
(unaudited) September 30, 2005
----------------------------------------------------------------------------------------
FROM OPERATIONS:
Net investment income $4,997,541 $9,882,683
----------------------------------------------------------------------------------------
Net realized gains from investment activities
and futures 2,583,129 3,290,230
----------------------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation
of investments and futures (4,032,640) (3,535,592)
----------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS PAID TO AUCTION
PREFERRED SHAREHOLDERS FROM:
Net investment income (800,430) (2,191,349)
----------------------------------------------------------------------------------------
Net realized gains from investment activities (1,187,664) (152,322)
----------------------------------------------------------------------------------------
Total dividends and distributions paid to auction
preferred shareholders (1,988,094) (2,343,671)
----------------------------------------------------------------------------------------
Net increase in net assets applicable to common
shareholders resulting from operations 1,559,936 7,293,650
----------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS PAID TO COMMON
SHAREHOLDERS FROM:
Net investment income (3,666,261) (7,663,934)
----------------------------------------------------------------------------------------
Net realized gains from investment activities (4,216,199) (1,207,587)
----------------------------------------------------------------------------------------
Total dividends and distributions paid to common
shareholders (7,882,460) (8,871,521)
----------------------------------------------------------------------------------------
Net decrease in net assets applicable to common
shareholders (6,322,524) (1,577,871)
----------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
Beginning of period 162,159,153 163,737,024
----------------------------------------------------------------------------------------
End of period $155,836,629 $162,159,153
========================================================================================
Accumulated undistributed net investment income $769,655 $238,805
========================================================================================
See accompanying notes to financial statements
--------------------------------------------------------------------------------
23
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Investment Grade Municipal Income Fund Inc. (the "Fund") was incorporated in
Maryland on August 6, 1992, and is registered with the Securities and Exchange
Commission under the Investment Company Act of 1940, as amended, as a closed-end
diversified management investment company. The Fund's investment objective is to
achieve a high level of current income that is exempt from federal income tax,
consistent with the preservation of capital. There can be no assurance that the
Fund's investment objective will be achieved.
In the normal course of business the Fund may enter into contracts that contain
a variety of representations or that provide indemnifications for certain
liabilities. The Fund's maximum exposure under these arrangements is unknown, as
this would involve future claims that may be made against the Fund that have not
yet occurred. However, the Fund has not had prior claims or losses pursuant to
these contracts and expects the risk of loss to be remote.
The preparation of financial statements in accordance with U.S. generally
accepted accounting principles requires the Fund's management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates. The
following is a summary of significant accounting policies:
VALUATION OF INVESTMENTS--The Fund calculates its net asset value based on the
current market value, where available, for its portfolio securities. The Fund
normally obtains market values for its securities from independent pricing
sources and broker-dealers. Independent pricing sources may use last reported
sale prices, current market quotations or valuations from computerized "matrix"
systems that derive values based on comparable securities. A matrix system
incorporates parameters such as security quality, maturity and coupon, and/or
research and evaluations by its staff, including review of broker-dealer market
price quotations, if available, in determining the valuation of the portfolio
securities. If a market value is not available from an independent pricing
source for a particular security, that security is valued at fair value as
determined in good faith by or under the direction of the Fund's Board of
Directors (the "Board"). Various factors may be reviewed in order to make a good
faith determination of a security's fair value. These factors include, but are
not limited to, the type and cost of the security; contractual or legal
restrictions on resale of the security; relevant financial or business
developments of the issuer; actively traded similar or related securities;
conversion or exchange rights on the security; related corporate actions; and
changes in overall market conditions.
--------------------------------------------------------------------------------
24
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
If events occur that materially affect the value of securities (particularly
non-U.S. securities) between the close of trading in those securities and the
close of regular trading on the New York Stock Exchange, the securities are fair
valued. The amortized cost method of valuation, which approximates market value,
generally is used to value short-term debt instruments with sixty days or less
remaining to maturity, unless the Board or its delegate determines that this
does not represent fair value. Securities traded in the over-the-counter
("OTC") market are valued at the last bid price available on the valuation date
prior to valuation.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME--Investment transactions are
recorded on the trade date. Realized gains and losses from investment
transactions are calculated using the identified cost method. Interest income
is recorded on an accrual basis. Discounts are accreted and premiums are
amortized as adjustments to interest income and the identified cost of
investments.
FUTURES CONTRACTS--Upon entering into a financial futures contract, the Fund is
required to deposit in a separate account with the futures broker through which
the transaction was effected an amount of cash and/or securities equal to a
certain percentage of the contract amount. This amount is known as the "initial
margin." Subsequent payments, known as "variation margin", are made or received
by the Fund each day, depending on the daily fluctuations in the value of the
underlying financial futures contracts. Such variation margin is recorded for
financial statement purposes on a daily basis as unrealized gain or loss until
the financial futures contract is closed, at which time the net gain or loss is
reclassified to realized gain or loss on futures. Variation margin calls could
be substantial in the event of adverse price movements.
Using financial futures contracts involves various market risks. If the Fund was
unable to liquidate a futures position due to the absence of a liquid secondary
market or the imposition of price limits, it could incur substantial losses and
would continue to be subject to market risk with respect to the position. In
addition, the Fund would continue to be required to make variation margin
payments and might be required to maintain the position being hedged or to
maintain cash or securities in a separate account. Furthermore, certain
characteristics of the futures market might increase the risk that movements in
the prices of the financial futures contracts might not correlate perfectly with
movements in the prices of the investments being hedged, including temporary
price distortion. The separate account for margin will be maintained at the
futures counterparty and may be subject to risks or delays if the counterparty
becomes insolvent.
--------------------------------------------------------------------------------
25
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
DIVIDENDS AND DISTRIBUTIONS--The Fund intends to pay monthly dividends to common
shareholders at a rate level that over time will result in the distribution of
all of the Fund's net investment income remaining after the payment of dividends
on any outstanding auction preferred shares. The dividend rate on the common
stock is adjusted as necessary to reflect the earnings rate of the Fund.
Dividends and distributions to common shareholders are recorded on the
ex-dividend date. Dividends to auction preferred shareholders are accrued daily.
The amount of dividends from net investment income and distributions from net
realized capital gains is determined in accordance with federal income tax
regulations, which may differ from U.S. generally accepted accounting
principles. These "book/tax" differences are either considered temporary or
permanent in nature. To the extent these differences are permanent in nature,
such amounts are reclassified within the capital accounts based on their federal
tax-basis treatment; temporary differences do not require reclassification.
CONCENTRATION OF RISK
The Fund follows an investment policy of investing primarily in municipal
obligations of various states. Economic changes affecting those states and
certain of their public bodies and municipalities may affect the ability of the
issuers within those states to pay interest on, or repay principal of, municipal
obligations held by the Fund.
INVESTMENT ADVISOR AND ADMINISTRATOR
The Board had approved an investment advisory and administration contract
("Advisory Contract") with UBS Global Asset Management (US) Inc. ("UBS Global
AM"), under which UBS Global AM had served as investment advisor and
administrator of the Fund. UBS Global AM is an indirect wholly owned asset
management subsidiary of UBS AG, an internationally diversified organization
with headquarters in Zurich and Basel, Switzerland and operations in many areas
of the financial services industry. In accordance with the Advisory Contract,
the Fund paid UBS Global AM an investment advisory and administration fee, which
was accrued weekly and paid monthly, at the annual rate of 0.90% of the Fund's
average weekly net assets applicable to holders of common and auction preferred
shares. UBS Global AM had agreed to waive 0.20% of the advisory and
administration fee, so that the Fund's effective fee was 0.70% of average weekly
net assets applicable to holders of common and auction preferred shares. This
waiver will continue indefinitely unless the Board agrees to any change. At
March 31, 2006, the Fund owed UBS Global AM $159,195, which is composed of
$204,679 of investment advisory and administration
--------------------------------------------------------------------------------
26
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
fees less fees waived of $45,484. For the six months ended March 31, 2006, UBS
Global AM waived $268,537 of investment advisory and administration fees from
the Fund. (After the end of the fiscal period, the Advisory Contract was
transferred to an affiliate of UBS Global AM as explained in the Subsequent
Event note further below.)
ADDITIONAL INFORMATION REGARDING COMPENSATION TO AFFILIATE OF A BOARD MEMBER
Effective March 1, 2005, Professor Meyer Feldberg accepted the position of
senior advisor to Morgan Stanley, resulting in him becoming an interested
director of the Fund. The Fund has been informed that Professor Feldberg's role
at Morgan Stanley does not involve matters directly affecting any UBS funds.
Fund transactions are executed through Morgan Stanley based on that firm's
ability to provide best execution of the transactions. During the six months
ended March 31, 2006, the Fund purchased and sold certain securities (e.g.,
fixed income securities) in principal trades with Morgan Stanley having an
aggregate value of $40,392,976. Morgan Stanley received compensation in
connection with these trades, which may have been in the form of a "mark-up" or
"mark-down" of the price of the securities, a fee from the issuer for
maintaining a commercial paper program, or some other form of compensation.
Although the precise amount of this compensation is not generally known by UBS
Global AM, UBS Global AM believes that under normal circumstances it represents
a small portion of the total value of the transactions. In addition, Morgan
Stanley may participate as a broker-dealer in auctions for the Fund's Auction
Preferred Shares and receive compensation therefore. Amounts received by Morgan
Stanley, if any, will vary depending upon that firm's participation in an
auction, and such amounts are calculated and paid by the auction agent from
money provided by the Fund.
AUCTION PREFERRED SHARES
The Fund has issued 800 shares of auction preferred shares Series A, 800 shares
of auction preferred shares Series B, and 600 shares of auction preferred shares
Series C, which are referred to herein collectively as the "APS." All shares of
each series of APS have a liquidation preference of $50,000 per share plus an
amount equal to accumulated but unpaid dividends upon liquidation.
Dividends and/or capital gain distributions, which are cumulative, are generally
reset every 7 days for each Series of APS. Dividend rates ranged
--------------------------------------------------------------------------------
27
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
from 2.405% to 3.200% and capital gain distribution rates ranged from 3.750% to
5.375% for the six months ended March 31, 2006.
The Fund is subject to certain restrictions relating to the APS. Failure to
comply with these restrictions could preclude the Fund from declaring any
distributions to common shareholders or repurchasing common shares and/or could
trigger the mandatory redemption of APS at liquidation value.
The APS are entitled to one vote per share and, unless otherwise required by
law, will vote with holders of common stock as a single class, except that the
APS will vote separately as a class on certain matters, as required by law. The
holders of the APS have the right to elect two directors of the Fund.
The redemption of the Fund's APS is outside of the control of the Fund because
it is redeemable upon the occurrence of an event that is not solely within the
control of the Fund.
PURCHASES AND SALES OF SECURITIES
For the six months ended March 31, 2006, aggregate purchases and sales of
portfolio securities, excluding short-term securities, were $81,829,332 and
$88,401,438, respectively.
FEDERAL TAX STATUS
The Fund intends to distribute substantially all of its tax-exempt income and
any taxable income and to comply with the other requirements of the Internal
Revenue Code applicable to regulated investment companies. Accordingly, no
provision for federal income taxes is required. In addition, by distributing
during each calendar year substantially all of its net investment income, net
realized capital gains and certain other amounts, if any, the Fund intends not
to be subject to a federal excise tax.
The tax character of distributions paid during the fiscal year ended September
30, 2005 was as follows:
DISTRIBUTIONS PAID FROM: 2005
-------------------------------------------------------------------------------
Tax-exempt income $9,850,254
-------------------------------------------------------------------------------
Ordinary income 24,785
-------------------------------------------------------------------------------
Net long-term capital gains 1,340,153
-------------------------------------------------------------------------------
Total distributions paid $11,215,192
===============================================================================
The tax character of distributions paid and the components of accumulated
earnings (deficit) on a tax basis for the current fiscal year will be calculated
after the Fund's fiscal year ending September 30, 2006.
--------------------------------------------------------------------------------
28
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
For federal income tax purposes, which was substantially the same for book
purposes, the tax cost of investments and the components of net unrealized
appreciation of investments at March 31, 2006 were as follows:
Tax cost of investments $261,062,552
==========================================================================
Gross unrealized appreciation 2,959,371
--------------------------------------------------------------------------
Gross unrealized depreciation (1,571,946)
--------------------------------------------------------------------------
Net unrealized appreciation $1,387,425
==========================================================================
SUBSEQUENT EVENT
After the end of the fiscal period covered by this report, the investment
advisory and administration contract (the "Advisory and Administration
Contract") between the Fund and UBS Global AM was transferred to UBS Global
Asset Management (Americas) Inc. ("UBS Global AM (Americas)"), a sister company
of UBS Global AM.
In connection with an internal reorganization involving UBS Global AM and UBS
Global AM (Americas), the Fund's Board of Directors approved the transfer of the
Advisory and Administration Contract from UBS Global AM to UBS Global AM
(Americas) effective April 1, 2006. All of the personnel of UBS Global AM who
previously provided investment advisory services to the Fund continue to provide
investment advisory services to the Fund as employees of UBS Global AM
(Americas). UBS Global AM (Americas) has the same contractual rights and
responsibilities under the Advisory and Administration Contract as those
previously held by UBS Global AM. The related fee waiver arrangement disclosed
above continues in effect, but now with UBS Global AM (Americas). UBS Global AM
and UBS Global AM (Americas) are both indirect wholly owned subsidiaries of UBS
AG.
--------------------------------------------------------------------------------
29
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
FINANCIAL HIGHLIGHTS
Selected data for a share of common stock outstanding throughout each period is
presented below
For the Six
Months Ended
March 31, 2006
(unaudited)
------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $15.66
------------------------------------------------------------------------------------------------
Net investment income 0.48
------------------------------------------------------------------------------------------------
Net realized and unrealized gains (losses) from investment activities (0.14)
------------------------------------------------------------------------------------------------
Common share equivalent of dividends and distributions paid to
auction preferred shareholders from:
Net investment income (0.08)
------------------------------------------------------------------------------------------------
Net realized gains from investment activities (0.11)
------------------------------------------------------------------------------------------------
Total dividends and distributions paid to auction preferred shareholders (0.19)
------------------------------------------------------------------------------------------------
Net increase from operations 0.15
------------------------------------------------------------------------------------------------
Dividends and distributions paid to common shareholders from:
Net investment income (0.35)
------------------------------------------------------------------------------------------------
Net realized gains from investment activities (0.41)
------------------------------------------------------------------------------------------------
Total dividends and distributions paid to common shareholders (0.76)
------------------------------------------------------------------------------------------------
Auction preferred shares offering expenses --
------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $15.05
------------------------------------------------------------------------------------------------
MARKET VALUE, END OF PERIOD $13.39
------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN(1) 5.50%
------------------------------------------------------------------------------------------------
RATIO TO AVERAGE NET ASSETS ATTRIBUTABLE TO COMMON SHARES:
Total expenses, net of fee waivers by advisor 1.62%*
------------------------------------------------------------------------------------------------
Total expenses, before fee waivers by advisor 1.95%*
------------------------------------------------------------------------------------------------
Net investment income before auction preferred shares dividends 6.29%*
------------------------------------------------------------------------------------------------
Auction preferred shares dividends from net investment income 1.01%*
------------------------------------------------------------------------------------------------
Net investment income available to common shareholders,
net of fee waivers by advisor 5.28%*
------------------------------------------------------------------------------------------------
Net investment income available to common shareholders,
before fee waivers by advisor 4.95%*
------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets applicable to common shareholders, end of period (000's) $155,837
------------------------------------------------------------------------------------------------
Portfolio turnover 32%
------------------------------------------------------------------------------------------------
Asset coverage per share of auction perferred shares, end of period $120,835
------------------------------------------------------------------------------------------------
* Annualized.
1 Total investment return is calculated assuming a $10,000 purchase of
common stock at the current market price on the first day of each period
reported and a sale at the current market price on the last day of each
period reported, and assuming reinvestment of dividends and other
distributions to common shareholders at prices obtained under the Fund's
Dividend Reinvestment Plan. Total investment return does not reflect
brokerage commissions and has not been annualized for the period of less
than one year. Returns do not reflect the deduction of taxes that a
shareholder could pay on Fund distributions.
--------------------------------------------------------------------------------
30
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
For the Years Ended September 30,
---------------------------------------------------------------------
2005 2004 2003 2002 2001
---------------------------------------------------------------------
$15.81 $16.31 $16.46 $16.15 $15.91
---------------------------------------------------------------------
0.95 0.93 0.95 1.11 1.17
---------------------------------------------------------------------
(0.02) 0.14 0.13 0.29 0.46
---------------------------------------------------------------------
(0.21) (0.08) (0.07) (0.12) (0.23)
---------------------------------------------------------------------
(0.01) (0.03) (0.02) (0.01) (0.07)
---------------------------------------------------------------------
(0.22) (0.11) (0.09) (0.13) (0.30)
---------------------------------------------------------------------
0.71 0.96 0.99 1.27 1.33
---------------------------------------------------------------------
(0.74) (0.93) (0.96) (0.93) (0.90)
---------------------------------------------------------------------
(0.12) (0.49) (0.18) (0.03) (0.19)
---------------------------------------------------------------------
(0.86) (1.42) (1.14) (0.96) (1.09)
---------------------------------------------------------------------
-- (0.04) -- -- --
---------------------------------------------------------------------
$15.66 $15.81 $16.31 $16.46 $16.15
---------------------------------------------------------------------
$13.44 $14.25 $14.86 $15.60 $15.39
---------------------------------------------------------------------
0.42% 5.57% 2.76% 7.96% 20.59%
---------------------------------------------------------------------
1.66% 1.53% 1.45% 1.48% 1.49%
---------------------------------------------------------------------
1.99% 1.86% 1.66% 1.67% 1.68%
---------------------------------------------------------------------
6.04% 5.91% 5.89% 6.89% 7.30%
---------------------------------------------------------------------
1.34% 0.53% 0.44% 0.73% 1.42%
---------------------------------------------------------------------
4.70% 5.38% 5.45% 6.16% 5.88%
---------------------------------------------------------------------
4.37% 5.05% 5.24% 5.97% 5.69%
---------------------------------------------------------------------
$162,159 $163,737 $168,888 $170,454 $167,295
---------------------------------------------------------------------
49% 45% 51% 21% 8%
---------------------------------------------------------------------
$123,709 $124,426 $155,555 $156,534 $154,559
=====================================================================
--------------------------------------------------------------------------------
31
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
GENERAL INFORMATION (UNAUDITED)
THE FUND
Investment Grade Municipal Income Fund Inc. (the "Fund") is a diversified,
closed-end management investment company whose shares trade on the New York
Stock Exchange ("NYSE"). The Fund's investment objective is to achieve a high
level of current income that is exempt from federal income tax, consistent with
the preservation of capital. The Fund's NYSE trading symbol is "PPM."
Comparative net asset value and market price information about the Fund is
available weekly in various publications. Effective as of April 1, 2006, the
Fund's investment advisor and administrator is UBS Global Asset Management
(Americas) Inc., an indirect wholly owned asset management subsidiary of UBS AG.
SHAREHOLDER MEETING INFORMATION
An annual meeting of shareholders of the Fund was held on February 3, 2006. At
the meeting, Richard Q. Armstrong, David J. Beaubien, Alan S. Bernikow, Richard
R. Burt, Meyer Feldberg, Bernard B. Garil and Heather R. Higgins were elected to
serve as directors until the next annual meeting of shareholders, or until their
successors are duly elected and qualified or until they retire, resign or are
earlier removed. The shares were voted as indicated below:
COMMON STOCK AND APS SHARES VOTING AS A SINGLE CLASS:
SHARES
TO VOTE FOR OR WITHHOLD AUTHORITY IN THE SHARES WITHHOLD
ELECTION OF: VOTED FOR AUTHORITY
----------------------------------------------------------------------------
Richard Q. Armstrong 9,358,716.845 592,102.754
----------------------------------------------------------------------------
David J. Beaubien 9,356,081.845 594,737.754
----------------------------------------------------------------------------
Alan S. Bernikow 9,359,750.845 591,068.754
----------------------------------------------------------------------------
Bernard B. Garil 9,360,648.845 590,170.754
----------------------------------------------------------------------------
Heather R. Higgins 9,360,743.845 590,075.754
============================================================================
AUCTION PREFERRED SHARES:
SHARES
TO VOTE FOR OR WITHHOLD AUTHORITY IN THE SHARES WITHHOLD
ELECTION OF: VOTED FOR AUTHORITY
----------------------------------------------------------------------------
Richard R. Burt 1,944 0
----------------------------------------------------------------------------
Meyer Feldberg 1,944 0
============================================================================
The Fund is not aware of any broker non-votes. (Broker non-votes are shares held
in street name for which the broker indicates that instructions have not been
received from the beneficial owners or other persons entitled to vote and for
which the broker does not have discretionary voting authority).
--------------------------------------------------------------------------------
32
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
GENERAL INFORMATION (UNAUDITED)
PROXY VOTING POLICIES, PROCEDURES AND RECORD
You may obtain a description of the Fund's (1) proxy voting policies, (2) proxy
voting procedures and (3) information regarding how the Fund voted any proxies
related to portfolio securities during the 12-month period ended June 30, 2005,
without charge, upon request by contacting the Fund directly at 1-800-647 1568,
online on the Fund's Web site: www.ubs.com/ubsglobalam-proxy, or on the EDGAR
Database on the SEC's Web site (http://www.sec.gov).
QUARTERLY FORM N-Q PORTFOLIO SCHEDULE
The Fund will file its complete schedule of portfolio holdings with the
Securities and Exchange Commission ("SEC") for the first and third quarters of
each fiscal year on Form N-Q. The Fund's Forms N-Q are available on the SEC's
Web site at http://www.sec.gov. The Fund's Forms N-Q may be reviewed and copied
at the SEC's Public Reference Room in Washington, D.C. Information on the
operation of the SEC's Public Reference Room may be obtained by calling
1-800-SEC 0330. Additionally, you may obtain copies of Forms N-Q from the Fund
upon request by calling 1-800-647 1568.
DIVIDEND REINVESTMENT PLAN
The Fund's Board has established a Dividend Reinvestment Plan (the "Plan") under
which all common shareholders whose shares are registered in their own names, or
in the name of UBS Financial Services Inc. or its nominee, will have all
dividends and other distributions on their shares of common stock automatically
reinvested in additional shares of common stock, unless such common shareholders
elect to receive cash. Common shareholders who elect to hold their shares in the
name of another broker or nominee should contact such broker or nominee to
determine whether, or how, they may participate in the Plan. The ability of such
shareholders to participate in the Plan may change if their shares are
transferred into the name of another broker or nominee.
A common shareholder may elect not to participate in the Plan or may terminate
participation in the Plan at any time without penalty, and common shareholders
who have previously terminated participation in the Plan may rejoin it at any
time. Changes in elections must be made in writing to the Fund's transfer agent
and should include the shareholder's name and address as they appear on the
share certificate or in the transfer agent's records. An election to terminate
participation in the Plan, until such election is changed, will be deemed an
election by a common shareholder to take all
--------------------------------------------------------------------------------
33
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
GENERAL INFORMATION (UNAUDITED)
DIVIDEND REINVESTMENT PLAN (CONCLUDED)
subsequent distributions in cash. An election will be effective only for
distributions declared and having a record date at least ten days after the date
on which the election is received.
Additional shares of common stock acquired under the Plan will be purchased in
the open market, on the NYSE or otherwise, at prices that may be higher or lower
than the net asset value per share of the common stock at the time of the
purchase. The number of shares of common stock purchased with each dividend will
be equal to the result obtained by dividing the amount of the dividend payable
to a particular shareholder by the average price per share (including applicable
brokerage commissions) that the transfer agent was able to obtain in the open
market. The Fund will not issue any new shares of common stock in connection
with the Plan. There currently is no charge to participants for reinvesting
dividends or other distributions. The transfer agent's fees for handling the
reinvestment of distributions will be paid by the Fund. However, each
participant pays a pro rata share of brokerage commissions incurred with respect
to the transfer agent's open market purchases of common stock in connection with
the reinvestment of distributions. The automatic reinvestment of dividends and
other distributions in shares of common stock does not relieve participants of
any income tax that may be payable on such distributions.
Experience under the Plan may indicate that changes are desirable. Accordingly,
the Fund reserves the right to amend or terminate the Plan with respect to any
dividend or other distribution if notice of the change is sent to Plan
participants at least 30 days before the record date for such distribution. The
Plan also may be amended or terminated by the transfer agent by at least 30
days' written notice to all Plan participants. Additional information regarding
the Plan may be obtained from, and all correspondence concerning the Plan should
be directed to, the transfer agent at PFPC Inc., P.O. Box 43027, Providence,
Rhode Island 02940-3027. For further information regarding the Plan, you may
also contact the transfer agent directly at 1-800-331 1710.
--------------------------------------------------------------------------------
34
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
BOARD APPROVAL OF INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT (UNAUDITED)
BACKGROUND--At a meeting of the board of Investment Grade Municipal Income Fund
Inc. (the "Fund") on February 8, 2006, the members of the board, including the
board members who are not "interested persons" of the Fund ("Independent
Directors"), as defined in the Investment Company Act of 1940, as amended,
considered and approved the transfer of the current Investment Advisory and
Administration Agreement between the Fund and UBS Global Asset Management (US)
Inc. ("UBS Global AM") to UBS Global Asset Management (Americas) Inc. ("UBS
Global Americas"), an affiliate of UBS Global AM. The board received information
and materials about the proposed transfer both at its November 2005 meeting and
at its February 2006 meeting. In considering the approval of the transfer of the
Investment Advisory and Administration Agreement (such transfer referred to as
the "New Investment Advisory and Administration Agreement"), the board reviewed
a memorandum from UBS Global AM explaining the reasons for the proposed
transfer, including that the transfer would result in management efficiencies
and eliminate the duplication of functions that had resulted from having two
registered investment advisors, UBS Global AM and UBS Global Americas, providing
investment advisory services to the UBS funds. The board also reviewed material
provided by UBS Global AM on UBS Global Americas, including that the current
portfolio manager for the Fund would not change as a result of the transfer from
UBS Global AM to UBS Global Americas. The board also noted management's
explanation that any expenses resulting from the transfer would be borne by UBS
Global AM, and not the Fund. The board also received and reviewed a draft of an
opinion to be provided by Dechert LLP, counsel to the Fund, that the proposed
transfer would not be considered an "assignment" of the existing investment
advisory contract under the Investment Company Act of 1940, as amended, because
(1) there would be no change of actual control of the investment advisor to the
Fund; (2) there would be no change of management of the investment advisor to
the Fund; (3) the nature, quality and extent of the investment advisory services
provided by UBS Global AM under the current Investment Advisory and
Administration Agreement would not change as a result of the transfer; (4) the
transfer would not result in any change in the fundamental investment processes,
investment strategies or investment techniques currently employed by UBS Global
AM portfolio managers or other investment professionals in providing services to
the Fund; and (5) there would be no change to any of the material terms of the
Investment Advisory and Administration Agreements as a result of the transfer.
The board took note of its knowledge of UBS Global AM
--------------------------------------------------------------------------------
35
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
BOARD APPROVAL OF INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT (UNAUDITED)
and its affiliates, including UBS Global Americas, and the current Investment
Advisory and Administration Agreement for the Fund, including the extensive
materials it had reviewed at its annual contract renewal meeting in the summer
of 2005 for the Fund, and noted that it had at that time received a memorandum
from its independent legal counsel discussing, among other things, the duties of
board members in considering approval of advisory and administration agreements.
In its consideration of the approval of the New Investment Advisory and
Administration Agreement, the board considered the following factors:
NATURE, EXTENT AND QUALITY OF THE SERVICES UNDER THE NEW INVESTMENT ADVISORY AND
ADMINISTRATION AGREEMENT--The board took note that at its last annual contract
renewal meeting for the Fund, in connection with its review of the Fund's
advisory and distribution agreements, it had received and considered extensive
information regarding the nature, extent and quality of management services
generally provided to the Fund by UBS Global AM under the Investment Advisory
and Administration Agreement, and a description of the administrative and other
services rendered to the Fund and its shareholders by UBS Global AM and UBS
Global AM's role in coordinating providers of other services to the Fund,
including custody, accounting and transfer agency services. The board
considered management's explanation that UBS Global Americas would provide
identical services under the New Investment Advisory and Administration
Agreement as were provided by UBS Global AM under the current Investment
Advisory and Administration Agreement. The board's evaluation of the services to
be provided by UBS Global Americas to the Fund took into account the board's
knowledge and familiarity gained as board members of funds in the UBS New York
fund complex, including the scope and quality of investment management and other
capabilities and the quality of administrative and other services, and
considered that based on the materials presented to them these services would
remain the same. The board also considered, based on its knowledge of UBS Global
AM and UBS Global Americas, the financial resources available to UBS Global
Americas and its parent organization, UBS AG, one of the leading financial
services companies in the world.
The board concluded that, overall, it was satisfied with the nature, extent and
quality of services expected to be provided to the Fund under the New Investment
Advisory and Administration Agreement.
--------------------------------------------------------------------------------
36
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
BOARD APPROVAL OF INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT (UNAUDITED)
MANAGEMENT FEES--The board noted that the current contractual management fee for
the Fund under the current Investment Advisory and Administration Agreement was
not proposed to be changed under the New Investment Advisory and Administration
Agreement. The board also considered that at its most recent annual contract
renewal meeting during the summer of 2005 it had received and reviewed
information on the contractual management fee payable by the Fund to UBS Global
AM, including information of management fees paid by comparable funds. The
board recognized that the current fee arrangements would not change as a result
of the transfer. It also was noted that UBS Global Americas would continue the
current fee waiver arrangements.
Taking all of the above into consideration, the board determined that the
proposed contractual management fee was reasonable in light of the nature,
extent and quality of the services proposed to be provided to the Fund under the
New Investment Advisory and Administration Agreement.
FUND PERFORMANCE--The board took into consideration the reports on Fund
performance received by the board at each meeting and the more extensive review
and discussion of Fund performance at its most recent annual contract renewal
meeting. The board also noted that the transfer would not result in any change
in the fundamental investment processes, investment strategies or investment
techniques of the Fund and that no changes in the current Fund personnel
overseeing Fund management were proposed or anticipated as a result of the
transfer.
Based on its prior review and the more updated performance information provided,
the board concluded that the Fund's investment performance was satisfactory.
ADVISOR PROFITABILITY--As UBS Global Americas would be a new advisor to the
Fund, profitability of UBS Global Americas in providing services to the Fund was
not a primary factor considered by the board. The board did note that at its
most recent annual contract renewal meeting it received and considered a
profitability analysis of UBS Global AM and its affiliates in providing services
to the Fund and had determined at that time that UBS Global AM's profitability
was considered not excessive in light of the nature, extent and quality of the
services provided to the Fund. The board also recognized that the management fee
would not change as a result of the transfer and the services provided to the
Fund by UBS Global Americas would be identical to those currently provided by
--------------------------------------------------------------------------------
37
INVESTMENT GRADE MUNICIPAL INCOME FUND INC.
BOARD APPROVAL OF INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT (UNAUDITED)
UBS Global AM, making the profitability data received at its last contract
renewal meeting still of some relevance. UBS Global AM also noted that a
significant benefit of the transfer of the Investment Advisory and
Administration Agreement to UBS Global Americas was to reduce a regulatory
capital requirement imposed on UBS Global AM, which was expected to permit the
eventual transfer of certain financial assets owned by UBS Global AM to satisfy
regulatory requirements to other parts of UBS AG for other corporate purposes.
ECONOMIES OF SCALE--The board noted that it had previously considered whether
economies of scale in the provision of services to the Fund would be passed
along to the shareholders during its most recent consideration of the annual
renewal of the Investment Advisory and Administration Agreement and did not see
the need to reconsider this factor again in the context of the transfer of the
agreement to a sister investment advisor.
OTHER BENEFITS TO UBS GLOBAL AMERICAS--The board considered other benefits
received by UBS Global Americas and its affiliates as a result of its proposed
relationship with the Fund, including the potential opportunity to offer
additional products and services to Fund shareholders. The board also considered
the benefits to be realized when certain assets of UBS Global AM were freed from
certain regulatory requirements and were available to be paid as a dividend from
one part of UBS AG to another part of UBS AG for such purposes as UBS AG deemed
appropriate.
In light of the costs of providing investment management, administrative and
other services to the Fund and UBS Global America's expected ongoing commitment
to the Fund, the profits and other ancillary benefits that UBS Global Americas
and its affiliates received or would receive were considered reasonable.
In light of all of the foregoing, the board approved the New Investment Advisory
and Administration Agreement for the Fund.
No single factor reviewed by the board was identified by the board as the
principal factor in determining whether to approve the New Investment Advisory
and Administration Agreement. The Independent Directors were advised by separate
independent legal counsel throughout the process. The board discussed the
proposed approval of the New Investment Advisory and Administration Agreement in
a private session with their independent legal counsel at which no
representatives of UBS Global AM or UBS Global Americas were present.
--------------------------------------------------------------------------------
38
(This page has been left blank intentionally)
--------------------------------------------------------------------------------
39
(This page has been left blank intentionally)
--------------------------------------------------------------------------------
40
DIRECTORS
Richard Q. Armstrong Meyer Feldberg
Chairman
Bernard B. Garil
David J. Beaubien Heather R. Higgins
Alan S. Bernikow
Richard R. Burt
PRINCIPAL OFFICERS
W. Douglas Beck Elbridge T. Gerry III
President Vice President
Mark F. Kemper Kevin McIntyre
Vice President and Secretary Vice President
Thomas Disbrow
Vice President and Treasurer
INVESTMENT ADVISOR AND
ADMINISTRATOR
UBS Global Asset Management (Americas) Inc.
51 West 52nd Street
New York, New York 10019-6114
The financial information included herein is taken from the records of the Fund
without examination by independent registered public accountants who do not
express an opinion thereon.
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that from time to time the Fund may purchase shares of its
common stock in the open market at market prices.
This report is sent to the shareholders of the Fund for their information. It is
not a prospectus, circular or representation intended for use in the purchase or
sale of shares of the Fund or of any securities mentioned in this report.
(C) 2006 UBS Global Asset Management (Americas) Inc. All rights reserved.
---------------
[LOGO OF UBS] UBS PRESORTED
STANDARD
U.S. POSTAGE
PAID
COMPUTERSHARE
---------------
UBS GLOBAL ASSET MANAGEMENT (AMERICAS) INC.
51 West 52nd Street
New York, New York 10019-6114
ITEM 2. CODE OF ETHICS.
-----------------------
Form N-CSR disclosure requirement not applicable to this filing of a semi-annual
report.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
-----------------------------------------
Form N-CSR disclosure requirement not applicable to this filing of a semi-annual
report.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
-----------------------------------------------
Form N-CSR disclosure requirement not applicable to this filing of a semi-annual
report.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
----------------------------------------------
Form N-CSR disclosure requirement not applicable to this filing of a semi-annual
report.
ITEM 6. SCHEDULE OF INVESTMENTS.
--------------------------------
Included as part of the report to shareholders filed under Item 1 of this form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
-------------------------------------------------------------------------
MANAGEMENT INVESTMENT COMPANIES.
--------------------------------
Form N-CSR disclosure requirement not applicable to this filing of a semi-annual
report.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
-------------------------------------------------------------------------
Form N-CSR disclosure requirement not yet effective with respect to the
registrant.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
--------------------------------------------------------------------------
COMPANY AND AFFILIATED PURCHASERS.
----------------------------------
There were no purchases made by or on behalf of the registrant or any
"affiliated purchaser," as defined in Rule 10b-18(a)(3) under the Securities
Exchange Act of 1934, as amended, of shares of the registrant's equity
securities made in the period covered by this report.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
-------------------------------------------------------------
The registrant's Board has established a Nominating and Corporate Governance
Committee. The Nominating and Corporate Governance Committee will consider
nominees recommended by shareholders
if a vacancy occurs among those board members who are not "interested persons"
as defined in Section 2(a)(19) of the Investment Company Act of 1940, as
amended. In order to recommend a nominee, a shareholder should send a letter to
the chairperson of the Nominating and Corporate Governance Committee, Richard R.
Burt, care of the Secretary of the registrant at UBS Global Asset Management, 51
West 52nd Street, New York, New York 10019-6114, and indicate on the envelope
"Nominating and Corporate Governance Committee." The shareholder's letter should
state the nominee's name and should include the nominee's resume or curriculum
vitae, and must be accompanied by a written consent of the individual to stand
for election if nominated for the Board and to serve if elected by shareholders.
ITEM 11. CONTROLS AND PROCEDURES.
---------------------------------
(a) The registrant's principal executive officer and principal financial
officer have concluded that the registrant's disclosure controls and
procedures (as defined in Rule 30a-3(c) under the Investment Company Act
of 1940, as amended) are effective based on their evaluation of these
controls and procedures as of a date within 90 days of the filing date
of this document.
(b) The registrant's principal executive officer and principal financial
officer are aware of no changes in the registrant's internal control
over financial reporting (as defined in Rule 30a-3(d) under the
Investment Company Act of 1940, as amended) that occurred during the
registrant's last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
ITEM 12. EXHIBITS.
------------------
(a) (1) Code of Ethics -- Form N-CSR disclosure requirement not applicable to
this filing of a semi-annual report.
(a) (2) Certifications of principal executive officer and principal financial
officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 is
attached hereto as Exhibit EX-99.CERT.
(a) (3) Written solicitation to purchase securities under Rule 23c-1 under
the Investment Company Act of 1940 sent or given during the period
covered by the report by or on behalf of the registrant to 10 or more
persons -- The registrant has not engaged in such a solicitation during
the period covered by this report.
(b) Certifications of principal executive officer and principal financial
officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is
attached hereto as Exhibit EX-99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Investment Grade Municipal Income Fund Inc.
By: /s/ W. Douglas Beck
-------------------
W. Douglas Beck
President
Date: June 6, 2006
------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ W. Douglas Beck
-------------------
W. Douglas Beck
President
Date: June 6, 2006
------------
By: /s/ Thomas Disbrow
------------------
Thomas Disbrow
Vice President and Treasurer
Date: June 6, 2006
------------